A new report highlights a "rare weak spot" for Apple's iPhone: its heavy reliance on carrier subsidies to sell the iPhone to customers for much less than its true cost.

During Apple's last quarterly earnings conference call, company officials revealed that the average selling price of the iPhone is nearly $660. But consumers pay much less than that, with the difference subsidized by carriers in exchange for signing a new two-year service contract.

While that strategy has worked very well in countries like the U.S., U.K. and elsewhere, where carrier subsidies are the norm, it has presented problems for Apple in markets that are predominantly prepaid. Profiling this issue on Monday, The Wall Street Journal declared that cheaper Google Android phones are "crushing the iPhone" in European countries hit hardest by the ongoing debt crisis.

"Its performance in parts of southern Europe where most consumers don't sign contracts and have to pay full freight for phones suggests Apple's position could suffer if carriers tire of underwriting most of the cost of the devices, as some are in countries such as Denmark and Spain," the report said.

Data from IDC shows that Android took well more than half of the smartphone market in Greece and Portugal in 2011, while Apple had a very small presence both countries. It's a very different story in the U.K. and U.S., where Apple took roughly 25 percent of the entire smartphone market in 2011.

Greece's top-selling smartphone last year was the Samsung Galaxy Mini, which sells for just $188 without a contract. For comparison, an older model 8-gigabyte iPhone 4 sells new for $680 without a subsidy in Portugal.

Apple Chief Executive Tim Cook said last October that the prepaid market is "very, very important" to his company. He said that was one of the reasons the company continues to sell its entry-level iPhone 3GS, to reach lower price points in both prepaid and postpaid markets.

There have been rumors for years that Apple plans to introduce a so-called "iPhone nano" to increase its presence in prepaid markets, particularly China. But so far Apple has declined to build an entirely new model for emerging markets, opting instead to continue to sell previous-generation handsets at a lower price.

the average selling price of the iPhone is nearly $660. But consumers pay much less than that

No. Consumers do not "pay much less than that". Consumers pay more than that if they go with a contract - they pay much less up front but essentially what they've done is taken out a high-interest loan from their carrier and used it to pay Apple for the phone.

No. Consumers do not "pay much less than that". Consumers pay more than that if they go with a contract - they pay much less up front but essentially what they've done is taken out a high-interest loan from their carrier and used it to pay Apple for the phone.

Its not high interest when you have to pay the same to higher amounts to be in prepaid.

It's no surprise that in countries like Greece, people are opting for cheap Android phones.

What matters most is to sell to people who actually have money and the iPhone is doing quite well in those places.

Unless Apple decides to make some really cheap, low featured phone, which would go against their philosophy, then I'd say that this is not an issue to be concerned with. There is enough demand for Apple products as it is, we don't need a bunch of people with no money queuing up for Apple products also. Is the goal to sell an iPhone to every person on the planet? I sure hope not.

If heading toward half a trillion dollars in market capitalization and gobbling up the majority of profits in the mobile market, Mac sales soaring, iPads becoming ubiquitous is being "crushed" then let's have some more "crushing" please. You trolls have never accepted the fact that Apple doesn't seem to notice or care that it is doomed.

The way to attack Apple is obviously price. Their technology is too far out on the bleeding edge for anyone to catch right now on that front. For instance, I use Apple products at home, but Micro Center was selling completely capable Windows 7 laptops with 16" screens for $250! To a certain, significant segment of the market, Apple can't touch that. And actually, having purchased one of these on impluse (after swearing I never would buy a Win machine again) I gotta admit - the technology is pretty good, things have not been stagnant by other vendors. Same thing applies to phones.

Apple can continue to dominate, no doubt, but it will need to be driven by great products, exquisitely executed, so that the bottom feeders are forced to play continuous catch-up. It should be interesting...

They are talking people who choose pre-pay for fix amount of service verses pay up front for a complete plan whether you use or not. We are talking about people who are living pay check to pay check and may not use their phone when the pre-pay runs out each month.

Apple has been clear not, they are not interested in your business if you can not afford their product. This is why Apple has $100B in the bank an the company choosing to service the people who are barely making ends meet do not have the cash that Apple has.

Again the article fails to understand how apple is operating, they think it better to sell more unit sales than adding 10X the profits on less units sales. It is just another option that Apple should join the race to the bottom.

Apple has never pretended to offer a product for everyone. They offer a quality, industry leading product. If you can't afford it, you're free to go elsewhere.

If you look at the results over the past decade, there's nothing wrong with that strategy. Indeed, by attempting to become the leader in terms of volume, Apple would probably have to make so many sacrifices that their long term success would be in jeopardy.

Choose what you're going to do, do it to the best of your ability, and ignore markets that don't interest you.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

Considering Apple has already locked up a large percentage of profits in the mobile space, going after marketshare in these countries is foolish. Companies exist to make money, not to have everyone using their products (the former does not always mean the latter).

The last time a company was in a position like this was Motorola and the original RAZR cost $500. It quickly became commoditized over the years and lost its luster.

Greece's top-selling smartphone last year was the Samsung Galaxy Mini, which sells for just $188 without a contract.

$188, as in dollars, or Euro? What margin is there in selling a $188 phone? Is it just to grab that share of the market? Looks like the strategy would be to get users using their devices, then hope they'll upgrade to a nicer device after saving for a while. But that could backfire if there's no brand loyalty or the cheap phone provides such a crappy experience that the users will jump ship to iOS when they have a chance.

No required data plan to create a subsidy and high import fees for iPhone comapred to local products is where the iPhone will lose out. I suspect that it's these low-end devices that will be predominately used as dumb-phones that can connect to WiFi that are giving Android its 850k/day activations (though that is slowing from a year prior). Bottom line: If it's not profitable then Apple doesn't care. There is no love loss for flooding a market with a loss-leader.

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$188, as in dollars, or Euro? What margin is there in selling a $188 phone? Is it just to grab that share of the market? Looks like the strategy would be to get users using their devices, then hope they'll upgrade to a nicer device after saving for a while. But that could backfire if there's no brand loyalty or the cheap phone provides such a crappy experience that the users will jump ship to iOS when they have a chance.

iPod Touch sells for not too much more than that, so it should be possible for Apple to field a competitive phone for, say, $250-odd. But it would probably cannibalize their more expensive phones by too much.

I'm not sure why an iPod Touch is $200 and an iPhone 4 is $700, when I would think iPod Touch has about 90% of the components iPhone 4 does.

So what? These phones are the equivalent of dirt cheap dumb phones now. These people would not have bought an iPhone, and Apple is not in a position to market to them. This is to be expected, and isn't a 'weak point' for APple since they're not going after that market (yet). Also, there's nothing to say these people won't eventually be in the market for an iPhone if/when their financial situation changes. Apple is not selling $100 phones. How is the fact that Apple is not catering to, and has never catered to all market segments 'news'? Is this a 'win' for Android? Sure, if you convince yourself hard enough that it is.

...Unless Apple decides to make some really cheap, low featured phone, which would go against their philosophy...

Not entirely true I would say. iPods comes in all sorts of fashions - from lower entrance to high end touch. Cheap is probably just a unlucky choice of word. Apple could use it's knowledge to produce a simple but high quality entrance device.

I know - it's been in the ruomor mill before, just pointing to a choice of words and ways that it could happen.

iPod Touch sells for not too much more than that, so it should be possible for Apple to field a competitive phone for, say, $250-odd. But it would probably cannibalize their more expensive phones by too much.

I'm not sure why an iPod Touch is $200 and an iPhone 4 is $700, when I would think iPod Touch has about 90% of the components iPhone 4 does.

D

The Touch has a lower margin than the iPhone but the Touch also has fewer and less expensive components.

For instance, people think the Touch and iPhone have the same display because they both have 960x480 3.5" "Retina Displays" but we know that the iPhone uses an IPS panel and the Touch a TN panel. Then there is quality of the backlight, the speed of the NAND flash, the A4 CPU, RAM, speaker, mic, vibrator, battery, GPS, cellular HW, and on and on and on...

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Waiting for an analyst report calling Apple out for not producing a sub-$99 iPhone Lite. Why does Apple need to address every single market in which it has a "hole," regardless of the ridiculousness of said market?

There are a lot of people here who think that Apple don't go after market share and don't do cheap, this despite the fact that they say they are interested in market share all the time, and want to beat Google.

Quote:

For instance, people think the Touch and iPhone have the same display because they both have 960x480 3.5" "Retina Displays" but we know that the iPhone uses an IPS panel and the Touch a TN panel. Then there is quality of the backlight, the speed of the NAND flash, the A4 CPU, RAM, speaker, mic, vibrator, battery, GPS, cellular HW, and on and on and on...

Probably the latest touch has better stats in all these departments than the 3GS, which will be the cheap phone when the iPhone 5 comes out. I think they will rename the 3GS but keep the same components, possibly a better chip. It then can sell of contract for $250 ish.

Quote:

Considering Apple has already locked up a large percentage of profits in the mobile space, going after marketshare in these countries is foolish. Companies exist to make money, not to have everyone using their products (the former does not always mean the latter).

Not entirely true I would say. iPods comes in all sorts of fashions - from lower entrance to high end touch. Cheap is probably just a unlucky choice of word. Apple could use it's knowledge to produce a simple but high quality entrance device.

I know - it's been in the ruomor mill before, just pointing to a choice of words and ways that it could happen.

Apple may offer some products with a cheap price point, but I believe that what Apple said is that they would never sacrifice quality over price. So, if it's possible for Apple to make something good and sell it for a decent price point, then they might just do so. But they wouldn't sell junk, just for the sake of selling junk, which is the strategy of many other companies.

I remember Steve Jobs saying something about that on a keynote from a few years back.

Waiting for an analyst report calling Apple out for not producing a sub-$99 iPhone Lite. Why does Apple need to address every single market in which it has a "hole," regardless of the ridiculousness of said market?

I think we should start a petition demanding that Apple make an iPhone that they can give away in cereal boxes. After all, they have $100 B to spend and think of what it would do for their market share.....

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

I think what many fail to recognize is that used iPhones have a tremendous resale value and many people, at least in Latin America, which I am familiar with, buy these used iPhones and jailbreak them to run prepaid minutes which they purchase at every little mom and pop store. These users and sales go under the radar. Tons of eBay and Craigslist iPhones sold in the US get shipped to Latin America. Subsidized phones are quite rare in these countries.

On the other hand there is not much of a a market for used Androids to my knowledge.

But do those $188 dollar Android phone contribute to the Android ecosystem much? Are their users big app-consumers, spendings loads in the various Android stores?

I'm betting not. Apple's customers not only pay more for the iPhone, but are big consumers in the iTunes Store and App Store world, and also gets Apple in the door for millions of potential iPad, Mac, and Apple TV users. Apple are doing very well from their consumers, and by trying to meet a low price point would only be lowering their margins and their ability to deliver quality experiences. These aren't markets Apple wants to be in, nor should they.

Let Android crush the iPhone in the low end. It isn't the low end that matters.

There are a lot of people here who think that Apple don't go after market share and don't do cheap, this despite the fact that they say they are interested in market share all the time, and want to beat Google.

Apple is not interested in market share AT THE EXPENSE of making a profit. If it was about market share regardless of other factors then we'd see a loss-leader iPad that was priced at $199 or below to drive out Amazon who is technically taking some of Apple's market share with the Kindle FIre.

We'd also see Apple give away their OSes to everyone if it was about market share regardless of profit. But that isn't what Apple does. They didn't even do that when HP and Dell were begging them for a way to get out from under MS's thumb back when Apple could have used the money.

Bottom line: Market share is only a factor IF you can make more money as you increase your unit share.

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I believe ifixit has pegged the "true cost" of an iPhone at close to the contract price,
in which case the "true enormous profit" isn't included.

There is no way for anyone outside Apple to know the "true cost". There are just too many unknowns. If anyone has come close, at least in understanding the details, I think it's Horace Deido. The graph is too large for the forum so I'll just post the link...

There is no way for anyone outside Apple to know the "true cost". There are just too many unknowns. If anyone has come close, at least in understanding the details, I think it's Horace Deido. The graph is too large for the forum so I'll just post the link...

I can't vouch for his numbers, but it is nice to see him including estimates for all the non-materials costs. That alone suggests that it's probably a better estimate than the silly ones that include only bills of materials.

They are talking people who choose pre-pay for fix amount of service verses pay up front for a complete plan whether you use or not. We are talking about people who are living pay check to pay check and may not use their phone when the pre-pay runs out each month.

As I understand, in many countries it is not just people who are living paycheck to paycheck who pre-pay phones, lots of people do. For example, in Italy phone contracts are taxed differently, and end up being less economical, so even wealthy people prepay or have "rechargeable" accounts.

Apple is not interested in market share AT THE EXPENSE of making a profit.

Who said they were? I suggest $250 which would give them some kind of margin for the 3GS, or cheapest device.

I think Apple should create three models based on the existing form factors when the iPhone NEXT - I don't want to get into the 5 debate - comes out. 3GS is non-retina but different price points. The lowest price point has a very low margin, the top price point is reasonable. iPhone 4, the standard normal sized phone, good margins all round, and the iPhone NEXT with very high margins.

Over all margins are maintained ish.

I say ish, because margins of 40% are not going to be maintainable. Of course if the next big thing is a TV with margins of 55% then the rest of the product line can take a margin cut.

Who said they were? I suggest $250 which would give them some kind of margin for the 3GS, or cheapest device.

I think Apple should create three models based on the existing form factors when the iPhone NEXT - I don't want to get into the 5 debate - comes out. 3GS is non-retina but different price points. The lowest price point has a very low margin, the top price point is reasonable. iPhone 4, the standard normal sized phone, good margins all round, and the iPhone NEXT with very high margins.

Over all margins are maintained ish.

I say ish, because margins of 40% are not going to be maintainable. Of course if the next big thing is a TV with margins of 55% then the rest of the product line can take a margin cut.

OK. Now, all you have to do is show us your resume and point out where you have experience that indicates that you know how to run Apple better than the existing Board and management team.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

As I understand, in many countries it is not just people who are living paycheck to paycheck who pre-pay phones, lots of people do. For example, in Italy phone contracts are taxed differently, and end up being less economical, so even wealthy people prepay or have "rechargeable" accounts.

Its fairly common in the UK, but was more common in the pre-smartphone age.

Who said they were? I suggest $250 which would give them some kind of margin for the 3GS, or cheapest device.

I think Apple should create three models based on the existing form factors when the iPhone NEXT - I don't want to get into the 5 debate - comes out. 3GS is non-retina but different price points. The lowest price point has a very low margin, the top price point is reasonable. iPhone 4, the standard normal sized phone, good margins all round, and the iPhone NEXT with very high margins.

Over all margins are maintained ish.

I say ish, because margins of 40% are not going to be maintainable. Of course if the next big thing is a TV with margins of 55% then the rest of the product line can take a margin cut.

1) Your comment was squarely on Apple caring about market share and it wasn't qualified as mine was to include market share only if they can increase profit. Increasing profit margin is not the same thing and I don't think anything expect Apple to maintain their margins as they move into lower tiers.

2) From what I've seen the iPhone 3GS commands a higher rate from carriers than $250. Regardless of what Apple is getting i don't see how their margin can be established. Surely they make less profit per handset because it's a less expensive handset but how do we know the margin of profit is lower?

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